August 18, 2019

U.S. Housing Recovery Seems Still on Track

For now, though, builders are building, sellers are selling and mortgage lenders are less nervous about extending credit to buyers.

The heady price increases in the first half of the year slowed a bit in July, according to data released on Tuesday.

But in the face of pent-up demand and emboldened consumers, home values were still heading upward at a healthy pace, rising 12.4 percent from July 2012 to July 2013, according to the Standard Poor’s Case/Shiller home price index, which tracks sales in 20 cities.

A separate index of mortgages backed by Fannie Mae and Freddie Mac showed an 8.8 percent gain in prices over the same time period.

Two national homebuilders, Lennar and KB Home, reported significant revenue growth and profits in the third quarter. Lennar said its third-quarter earnings rose 39 percent over the third quarter of last year, and KB said its profit had increased sevenfold.

“We still have a lot of young people that are going to start moving out and forming households and we’re going to have to find housing for them,” said Patrick Newport, the chief United States economist for IHS Global Insight. “There are shortages of homes just about everywhere.”

Higher home prices help the economy not just by strengthening the construction and real estate industries, but by making homeowners feel wealthier and more likely to spend.

While the number of Americans who lost the equity in their homes in the housing crash set records, rebounding prices have helped nudge more and more households back above water. According to CoreLogic, 2.5 million households regained equity in their homes in the second quarter.

Mr. Newport said the full effects of higher mortgage rates had probably not shown up in the numbers yet.

Rates increased from about 3.4 percent on 30-year fixed-rate loans in January to about 4.4 percent in July, according to a survey by Freddie Mac, and many loans were written at even higher rates this summer. But they remain well below typical rates in recent decades, and mortgage borrowing costs have already eased a bit from their recent peak now that the Federal Reserve opted last week not to begin a wind-down of stimulus measures.

Rising rates may not torpedo the housing market recovery, but they have made refinancing much less appealing.

The number of mortgage applications for purchases has climbed by 7 percent over the last year, according to the Mortgage Bankers Association, but refinance requests have fallen by 70 percent since early May.

As a result, banks have laid off thousands of workers in their mortgage units. Citigroup laid off 1,000 workers from its mortgage business, it said on Monday, following Wells Fargo and Bank of America, which have both done layoffs in recent months.

Refinancing also gave households more spending power as it lowered monthly payments.

Analysts offered a cornucopia of reasons for the continuing strength of the housing market: people rushing to buy before prices and interest rates increased further, a gradual relaxation of lending standards, an uptick in inventory, a smaller share of foreclosures in the sales stream and large-scale buying by investors looking to put houses on the rental market.

Still, some analysts questioned whether fundamental factors like job and wage growth would sustain the market and restore first-time buyers to the market. Others warned of a lurking shadow inventory.

“While recent results have been considerably better than those seen earlier in the cycle, and also better than we had anticipated, we have not given up on the argument that a large supply overhang of existing homes (factoring in all those in foreclosure or soon to be) promises to keep pressure on prices for some time,” Joshua Shapiro, the chief United States economist for MFR, wrote in a note to investors.

Once the backlog of demand is absorbed, continued strength will depend heavily on consumer confidence. That’s where politics, including a looming battle over federal spending and the debt ceiling, could stall improvement.

“The real test will come over the next few months, given the sharp drop in mortgage demand and the potential for a rollover in consumers’ confidence as Congress does its worst,” wrote Ian Shepherdson, an economist with Pantheon Macroeconomics.

On Tuesday, the Conference Board, a New York-based private research group, reported that Americans’ confidence in the economy fell slightly in September from August, as many became less optimistic about hiring and pay increases over the next six months. The September reading dropped to 79.7, down from 81.8 the previous month, but remained only slightly below June’s reading of 82.1, the highest in five and a half years.

Year-over-year prices were up in all 20 cities tracked by Case/Shiller, but the gains varied widely, from 3.5 percent in New York and 3.9 percent in Cleveland on the low end to a frothy 24.8 percent in San Francisco and 27.5 percent in Las Vegas.

The month-to-month increase in the Case/Shiller index slowed to 0.6 percent, after gains of 1.7 percent in April, 0.9 percent in May and 0.9 percent in June.

Asked if the slowdown in growth was alarming, Robert Shiller, the Yale economist who helped develop the home price index, said no. “I’m not worried. I think that would be a good thing,” he said.

“I’m worrying more about a bubble — in some cities, it’s looking bubbly now.”

Still, Mr. Shiller said, even the bubbliest markets were still well below their peak.

Other analysts raised the same point. Prices in San Francisco are still only at 2004 levels, cautioned Steve Blitz, chief economist for ITG Investment Research. “For those who bought and still hold homes in 2005, ’06 and ’07, they may still be in a negative equity position, depending on the terms of their mortgage,” Mr. Blitz wrote. “Don’t let those double-digit year-over-year percentage gains bias opinion to believe all is all right.”

Article source: http://www.nytimes.com/2013/09/25/business/economy/home-prices-still-rising-but-at-slower-pace.html?partner=rss&emc=rss

U.S. Existing Home Sales Rise to 6-1/2 Year High

The National Association of Realtors said on Thursday existing home sales increased 1.7 percent to an annual rate of 5.48 million units last month, the highest level since February 2007 when property values began to decline after the sector’s boom and bust.

Economists polled by Reuters had expected home resales to rise to a 5.25 million-unit rate. The housing recovery has helped shore up the economy by bolstering household finances and supporting consumer spending.

Lawrence Yun, NAR chief economist, said the housing market may be experiencing a temporary peak as would-be buyers sitting on the fence are pushed to close deals ahead of likely price and borrowing cost increases.

“Rising mortgage interest rates pushed more buyers to close deals, but monthly sales are likely to be uneven in the months ahead from several market frictions,” he said, pointing to tight inventory limiting choices in many real estate pockets.

Mortgage rates have risen in recent months after hitting a low of 3.35 percent in May, according to data from Freddie Mac. The rate for a 30-year fixed rate loan was at 4.5 percent as of September 19, hovering near a two-year high.

The Federal Reserve cited tighter financial conditions as one reason for its decision this week not to taper its stimulus program aimed at supporting growth, a surprise to investors and economists who had expected it to scale back bond-buying. Slower asset purchases would have pushed mortgage rates even higher.

Last month, the inventory of unsold homes on the market increased slightly and represented 4.9 months’ supply at August’s sales pace, the NAR said.

“There’s an ongoing housing shortage,” Yun said, adding: “I don’t anticipate this housing shortage to go away.”

The months’ supply remained below the 6.0 months that is normally considered as a healthy balance between supply and demand. The U.S. housing market had been impacted by tight supplies in some parts of the country.

The median home sales price in August rose 14.7 percent from a year ago to $212,100.

Distressed properties, foreclosures and short sales, which typically occur at deep discounts, accounted for about 12 percent of overall sales last month, the lowest since NAR began tracking the data in 2008.

Investors bought 17 percent of homes in August, with first-time buyers accounting for 28 percent of the transactions.

Rising home values and mortgage interest rates have started to price some first-time buyers out of the housing market and affect affordability.

Article source: http://www.nytimes.com/reuters/2013/09/19/business/19reuters-usa-economy-existinghomes.html?partner=rss&emc=rss

Economix Blog: Progress on Housing Finance Reform

Phillip Swagel is a professor at the School of Public Policy at the University of Maryland, and was assistant secretary for economic policy at the Treasury Department from 2006 to 2009.

Taxpayers received $66 billion of good news last Monday in the form of dividends to the Treasury from Fannie Mae and Freddie Mac as part of the compensation for the bailout of the two government-sponsored enterprises (G.S.E.’s). The bad news is that these payments reflect the fact that the two firms remain in government hands nearly five years after being taken into conservatorship in September 2008, putting taxpayers at risk in the event of another housing downturn.

A fundamental change in this situation requires Congressional action, which is always difficult in our divided political system. Even so, legislation introduced recently by a bipartisan group of eight senators led by Bob Corker, a Tennessee Republican, and Mark Warner, a Virginia Democrat, has focused renewed attention on housing finance reform.

Today’s Economist

Perspectives from expert contributors.

I was among the many people providing technical advice to the group working on the Corker-Warner proposal and think there is much to like in it.  The legislation includes the essential elements of housing finance reform: a dominant role for private capital; considerable protection for taxpayers against future bailouts; a secondary government backstop to ensure stability; competition and entry by new firms into housing finance so that no future entity is too big to fail; a clear delineation of the roles of private firms and the government; an empowered regulator to ensure that loan quality remains high for guaranteed mortgages; and support for activities related to affordable housing.

A paper I wrote with Ellen Seidman, Sarah Rosen Wartell, and Mark Zandi has a proposal similar in many respects to the Corker-Warner bill. Clicking through to the biographies of my co-authors quickly reveals that the four of us come at this issue from quite different political perspectives.  The common ground we reached in a sense mirrors that of the bipartisan group of senators in looking to move forward with reform rather than allowing Fannie and Freddie to remain effectively part of the government, which is the outcome that will obtain if no action is taken.

A key feature of the Corker-Warner proposal is the requirement that private investors must put up capital equal to 10 percent of the loans that will be guaranteed by a new government agency set up along the lines of the Federal Deposit Insurance Corporation. This provision alone goes a long way toward restoring the dominant role of private incentives and protecting taxpayers against the possibility of another costly housing bailout.  Indeed, Fannie and Freddie would have easily made it through the crisis had this been in place. The legislation further allows new firms to enter the mortgage securitization business now dominated by the two G.S.E.’s.  With enough competition, no firm in the future housing finance system will be too big to fail.

At the same time, a secondary government guarantee behind the private capital would ensure that mortgage financing is available across economic conditions, with taxpayers compensated for taking on residual housing credit risk.  This contrasts with the failed system of the past in which the government backstop was implicit but free.

The U.S. Mortgage Market

Some background might be useful for readers unfamiliar with the workings of our convoluted housing finance system. 

Originators such as banks make loans, which Fannie and Freddie then buy and bundle into mortgage-backed securities with a guarantee against losses from homeowner defaults.  The two firms then sell these securities to investors, now including the Federal Reserve as part of its quantitative easing program.  Banks and other lenders like the arrangement because they can readily sell loans to Fannie and Freddie and get cash to lend to yet again. The setup benefits home buyers through the greater availability of financing and lower interest rates as American families effectively tap into global financial markets for their mortgages.

There is a cost, however, borne by taxpayers. When the government took over the two firms in 2008, the Treasury Department promised to provide cash as needed to keep Fannie and Freddie afloat, effectively ensuring that the two firms’ $5 trillion in obligations will be honored (in addition to guarantees, that huge sum includes debt issued by the G.S.E.’s to finance their own purchases of mortgage-backed securities). Investors had long believed that the government would support the firms in a pinch, a belief that gave the G.S.E.’s an advantage over other financial firms.

Actions taken during the crisis turned the previously implicit government guarantee into an explicit one, at a cost to taxpayers that peaked at $189 billion at the end of 2012. American families at least got something from the bailout of Fannie and Freddie, as mortgages were available throughout the crisis even as other parts of credit markets experienced strains. The firms have paid some $132 billion in dividends to the government, but these funds do not get credited as paying down the taxpayer assistance. Moreover, the firms are not allowed to build up reserves with which to cover any potential future losses. Instead, the firms’ profits are swept to the Treasury, where they provide a temptation to Congress and the president as a means by which to pay for new government spending.

Fannie and Freddie today are linchpins of the nation’s housing finance system, providing guarantees on two-thirds of the mortgages originated in 2012.  Together with agencies like the Federal Housing Administration, the government stands behind nearly 90 percent of new mortgages. Taxpayers are thus extraordinarily exposed to future housing-related losses.

Many who follow Fannie and Freddie had long warned that their problems posed a risk to the financial system. The imperative of housing finance reform is to devise a new system that protects taxpayers against another costly bailout while ensuring that American families have access to mortgages on reasonable terms.

Challenges With Reform

A key challenge in moving forward with reform is that bringing in private investors who take losses ahead of taxpayers will translate into higher mortgage interest rates, reflecting the compensation demanded by private investors to take on housing credit risk. Indeed, in the past, proponents of reform were sometimes derided as being “anti-housing” for supposedly wishing for higher interest rates.  The crisis has mostly silenced this criticism, with broad agreement that reform must involve greater private capital to take losses ahead of any potential government backstop.

The Corker-Warner proposal requires investors to put at risk funds equal to 10 percent of the value of the mortgages included in mortgage-backed securities to be guaranteed by the government. The total losses of Fannie and Freddie during the crisis were equal to about 4 percent of the firms’ combined assets. The firms were shielded by homeowner down payments and by private mortgage insurance before they had to make good on their guaranteed securities, but the housing price collapse of more than 30 percent combined with concentrations of Fannie and Freddie’s risk in key bubble states such as Nevada combined to generate losses that wiped out the firms’ thin capital cushions of less than 1 percent of their assets. 

With a 10 percent capital requirement, the firms would easily have made it through the worst housing cycle in recent memory.  To be sure, a 10 percent capital requirement is not the same as the 100 percent in a fully private system.  But a fully private system is neither feasible nor stable. By the standards of the recent housing debacle, the Corker-Warner legislation provides considerable protection for taxpayers.

Still, any government guarantee gives rise to moral hazard, since investors will naturally seek to obtain government backing on risky mortgages that provide a high private upside if the loan works out, and a loss for taxpayers if it does not. The Corker-Warner legislation creates an empowered regulator with a mandate to ensure that underwriting standards remain high. This is helpful, but not enough by itself — after all, regulators failed to prevent the previous bout of poor lending behavior.

An important insight, however, is that requiring substantial private capital to take losses ahead of the government guarantee helps to mitigate the moral hazard.  This is because the investors with their funds at stake have a powerful incentive to enforce prudent underwriting.  The presence of first-loss private capital thus brings market discipline to bear by aligning private interests with those of the government. This is exactly the point made by the Federal Reserve chairman, Ben S. Bernanke, in an April 2007 speech on financial regulation. The Corker-Warner proposal involves sufficient private capital to generate a meaningful incentive for prudence.

A further critique of the Corker-Warner approach is that the government inevitably will charge too little for its guarantee. Indeed, this would be in keeping with other government insurance offerings, such as the federal flood insurance program.  In the first place, setting a price for the guarantee will be better than leaving it implicit and unpriced, as in a system that is notionally private until the crisis actually hits. Moreover, as reform brings in private capital and the government share of the housing market recedes from its current 90 percent, market-based mechanisms like auctions can be used to set the price of the government backstop.

Moving Forward

The policy debate over housing finance reform is a microcosm of the larger debate about the role of the government in society.   A government guarantee lends stability and ensures that taxpayers can get mortgages across economic conditions, but puts taxpayers at risk in the event of the next housing downturn. The Corker-Warner proposal seeks a balance by ensuring that considerable private capital is at risk ahead of the guarantee.

Other possible outcomes for housing finance reform are to maintain the status quo in which Fannie and Freddie are controlled by the government and there is no private capital, or to move to a private system in which government involvement is limited to the small share of loans made with the involvement of agencies such as the Federal Housing Administration that work with targeted groups of borrowers.

Both of these alternatives are flawed. The current government-dominated system exposes taxpayers to needless risk and stifles the possibility of beneficial competition and innovation.  Not moving forward with reform would lock in this unfortunate situation.

A move to a fully private system seems desirable, but it is difficult to see this as a stable outcome or one that actually protects taxpayers in the event of an inevitable future crisis.  This is because the government will feel compelled to intervene in the face of any future housing market collapse, regardless of promises that the system was private. To do otherwise would be to countenance an economic catastrophe.  A housing finance system that is notionally private would inadvertently recreate the key flaw of the past with an implicit, and uncompensated, guarantee.

Moreover, it is a political reality that legislation for a fully private system has scant chances.  Delay in moving forward with a pragmatic reform maintains the current system in which there is a dominant government role with a full guarantee and no private capital. Holding out for the unattainable but theoretically perfect housing finance system thus cements in place the nationalized outcome least favored by proponents of a market-based approach.

Article source: http://economix.blogs.nytimes.com/2013/07/08/progress-on-housing-finance-reform/?partner=rss&emc=rss

Fair Game: Fannie Mae, Freddie Mac and the Same Old Song

But ours is an imperfect world, and discussions about these questions have taken place mostly behind closed doors in Washington. The rest of us Americans, who guarantee the mortgage market, have not been given much of a say.

This is a pity because the future of housing finance in this country seems to be coming down to two taxpayer-backed concepts. One is the status quo, with Fannie Mae and Freddie Mac continuing to back the vast majority of mortgages. The other is a newly conceived public guarantor with some of the same problems that got Fannie and Freddie into trouble.

Let’s begin with the status quo. The taxpayer rescue of Fannie and Freddie in September 2008 has cost $137 billion so far. While this has been paid down from an initial $187.5 billion, taxpayers aren’t likely to get their money back anytime soon. Last fall, the regulator charged with overseeing Fannie and Freddie estimated that the taxpayer bill for the companies could be $200 billion by the end of 2015.

Still, Washington has shown little interest in winding down Fannie and Freddie. The ostensible reason is that there would be no mortgage market without them; private lenders are still unwilling to make home loans that they want to hold as investments, so Fannie and Freddie still have to buy or guarantee them.

But doing nothing also serves other interests. Since 2011, any increase in the guarantee fees the companies receive when backing a mortgage goes to the Treasury, not to repay taxpayers. The companies, therefore, have become a government piggy bank.

There is another group that would prefer Fannie and Freddie to remain as is: the former executives who still receive benefits from the companies and the taxpayers who own them.

According to documents reviewed by The New York Times, $25.3 million in pension payments went to 1,785 former Fannie executives last year; an additional $12.7 million went to 871 former Freddie officials.

Had the companies not been rescued and instead filed for bankruptcy, the former executives’ pensions would be the obligation of the Pension Benefit Guaranty Corporation, financed by corporations whose plans it backs. Instead, taxpayers have been on the hook for five years.

Among the retirees receiving pensions courtesy of the taxpayer are Franklin D. Raines, Fannie Mae’s former chief executive; J. Timothy Howard, the company’s former chief financial officer; and Leland C. Brendsel, former chief executive of Freddie Mac.

All three men were ousted from their companies amid accounting scandals — Freddie’s in 2003 and Fannie’s a year later. All were paid handsomely through their tenures. Between 1998 and 2004, for example, Mr. Raines received $90 million in compensation, regulators found. Mr. Howard received $30 million over the period. When Mr. Brendsel left Freddie Mac, he was earning $1.2 million a year in salary.

Even so, Mr. Raines receives a pension of $2,639 from taxpayers each month, the documents show; Mr. Howard receives $4,395 and Mr. Brendsel $8,039. Requests for comment from the former executives’ lawyers were not returned.

The documents show that taxpayers spent $11 million last year on medical costs for 1,392 Fannie and Freddie retirees. And from September 2008 through 2012, taxpayers also spent $114 million for legal bills racked up by former executives and directors testifying in lawsuits relating to the accounting scandals or financial crisis inquiries.

These payments are governed by contracts struck before Fannie and Freddie fell, so there is little that anyone can do to revoke them. But Representative Randy Neugebauer, a Texas Republican on the House Financial Services Committee, said they made him “nail-biting mad.” He added: “Taxpayers have put all this money into these entities. The attorneys have gotten a lot richer and the executives that led these organizations before their demise are still getting big paychecks. It’s very frustrating.”

LET’S move on to the second option for housing finance that’s gaining traction. It is outlined in “Housing America’s Future: New Directions for National Policy,” a report published last month by the Housing Commission of the Bipartisan Policy Center.

While the authors of the report contend that it was intended to set a new direction for federal housing policy, its reliance on a government backstop is awfully familiar.

The report calls for replacing Fannie and Freddie with a public utility to guarantee a vast number of home mortgages against default. The loan size to be covered is unspecified, but the commission suggests that it should be less than the current Fannie and Freddie loan limit of $417,000 in most markets.

Article source: http://www.nytimes.com/2013/03/24/business/fannie-mae-freddie-mac-and-the-same-old-song.html?partner=rss&emc=rss

Mortgages: The Right Time and Place to Buy

The answer depends on where you’re buying. Interest rates aren’t expected to rise much this year, but the same cannot be said for prices.

Economists in recent interviews agreed that the rate for a 30-year fixed mortgage was unlikely to rise much above 4 percent this year. House prices, however, are rising nearly everywhere, and nowhere as rapidly as in the Sunbelt states.

The national average for a 30-year fixed-rate mortgage was 3.52 percent, according to Freddie Mac’s weekly survey released on Thursday, up from 3.51 percent the previous week. The average rate for a 5/1 adjustable-rate mortgage was 2.63 percent, up from 2.61 percent.

Despite an upward trend over the last few months, the 30-year rate is unlikely to rise beyond 3.75 percent “for the foreseeable future,” said Keith T. Gumbinger, the vice president of HSH.com, a financial publisher.Stan Humphries, the chief economist of Zillow.com, agreed. Given the Federal Reserve’s continuing effort to keep rates down, and barring unexpectedly fast economic growth, he said, “it feels like we’re in an environment for the next year, year and a half of really low rates.”

Homeowners hoping to refinance a loan are likely to be the most sensitive to incremental upticks in what are still attractive lending rates, said Jed Kolko, the chief economist of Trulia.com. Indeed, the Mortgage Bankers Association predicts that by year-end, refi volume will shrink to 40 percent of all mortgage originations, versus 75 percent in 2012. Another association prediction for year-end: the 30-year rate will be about 4.4 percent.

Buyers, on the other hand, may be in a stronger position. “When rates are rising, it’s because the economy is improving,” Mr. Kolko said, “so buyers are in a better position to put down the down payment and qualify for a mortgage.”

For buyers able to get financing, “getting in a little earlier would be preferable before prices and rates rise too much,” said Lawrence Yun, the chief economist of the National Association of Realtors.

That is particularly true for Federal Housing Administration loans. Mortgage insurance premiums on these loans will rise by up to 0.10 percent of the loan amount as of April 1. To avoid a higher premium, borrowers would need to apply and obtain a case number before then.

In markets where housing inventory is tight, Mr. Yun said, buyers will have to make a trade-off: act right away to get the best financial deal, or wait for more choices and perhaps pay a bit more.

According to data gathered by Zillow, residential prices are rising at double-digit rates in sections of California, and the Phoenix and Las Vegas areas. As of January, the median sale price was up 14 percent over the previous year, to $448,500, in the San Francisco Bay area, and 23 percent, to $169,200, in the Phoenix market. “The markets that are more Midwest and Northeast are seeing much lower growth rates,” Mr. Humphries said. “That’s partly because the buyer profile in the Sunbelt markets looks considerably different, with a lot of retirees, second-home buyers, and international buyers.”

In much of New York, New Jersey and Connecticut, buyers need not be so concerned about beating price appreciation. All three still have a backlog of foreclosures yet to make their way through the courts. A “looming shadow inventory” could keep prices fairly flat this year, with Manhattan the exception, Mr. Yun said.

Article source: http://www.nytimes.com/2013/03/10/realestate/the-right-time-and-place-to-buy.html?partner=rss&emc=rss

DealBook: Banks Reach Settlements on Mortgages

Bank of America bought Countrywide in 2008.Kevork Djansezian/Associated PressBank of America bought Countrywide in 2008.

11:38 a.m. | Updated

Bank of America agreed on Monday to pay more than $10 billion to Fannie Mae to settle claims over troubled mortgages that soured during the housing crash, mostly loans issued by the bank’s Countrywide Financial subsidiary.

Separately, federal regulators reached an $8.5 billion settlement on Monday to resolve claims of foreclosure abuses that included flawed paperwork used in foreclosures and bungled loan modifications by 10 major lenders, including JPMorgan Chase, Bank of America and Citibank. About $3.3 billion of that settlement amount will go toward Americans who went through foreclosure in 2009 and 2010, while $5.2 billion will address other assistance to troubled borrowers, including loan modifications and reductions of principal balances. Eligible homeowners could get up to $125,000 in compensation.

The two agreements are not directly related, but they illustrate the extent of the banks’ role in the excesses of the credit boom, from the making of loans to the seizure of homes.

Related Links

Under the terms of the Bank of America deal, the bank will pay Fannie Mae $3.6 billion and will also spend $6.75 billion to buy back mortgages from the housing finance giant.

The settlement will resolve all of the lender’s disputes with Fannie Mae, removing a major impediment to Bank of America’s rehabilitation. The bank had settled its fight with Freddie Mac, the other government-owned mortgage giant, in 2011.

Both Fannie and Freddie, which have posted billions of dollars in losses in recent years, have argued that Countrywide misrepresented the quality of home loans that it sold to the two entities at the height of the mortgage bubble. Bank of America assumed those troubles when it bought Countrywide in 2008.

Brian Moynihan, chief of Bank of America.Win McNamee/Getty ImagesBrian Moynihan, chief of Bank of America.

Before the latest settlement announced on Monday, the Countrywide acquisition had cost Bank of America more than $40 billion in losses on real estate, legal costs and settlements, according to several people close to the bank.

By removing part of the bank’s mortgage albatross, the move is a continued retreat from home lending by Bank of America, even as rivals including JPMorgan Chase and Wells Fargo compete for the profitable refinance business that has boomed with interest rates persistently low.

Bank of America also agreed to sell the servicing rights on about $306 billion worth of home loans to other firms. In separate statements, Nationstar Mortgage Holdings and the Newcastle Investment Corporation announced they were buying the rights. Those servicing costs, which were roughly $3.4 billion in the third quarter, have weighed on the bank’s profits, especially as borrowers fall behind on their bills.

Brian T. Moynihan, the bank’s chief executive, said in November that he intended to sell off about two million loans the bank currently serviced.

“Together, these agreements are a significant step in resolving our remaining legacy mortgage issues, further streamlining and simplifying the company and reducing expenses over time,” Mr. Moynihan said in a statement on Monday.

Bank of America said it expected the settlement to hurt its fourth-quarter earnings by $2.5 billion because of costs tied to foreclosure reviews and litigation. The firm also expects to record a $700 million charge, an accounting move known as a debt-valuation adjustment, related to an improvement in the prices of its bonds.

The deal on Monday helps the bank move away from its troubled mortgage business. Still, the bank’s attempts to resolve other costly mortgage litigation have so far been stymied. Looking to appease investors that sued the bank for losses when mortgages packaged into securities imploded during the financial crisis, the bank agreed to pay $8.5 billion in June 2011. But the settlement, which would help mollify investors including the Federal Reserve Bank of New York and Pimco, has been stalled.

Further thwarting Bank of America’s retreat from the mortgage business, federal prosecutors sued the bank in October, accusing it of churning through loans so quickly that quality controls were virtually forgotten. The Justice Department sued the bank under a law that could mean Bank of America could pay well more than $1 billion to settle.

Bank of America has been embroiled with other legal woes, including accusations that it misled investors about the acquisition of Merrill Lynch. Shareholders, led by pension funds, had said the bank provided false and misleading statements about the health of the Wall Street firm, which, unknown to the public, was racking up huge losses in late 2008 amid turmoil in the markets.

The separate agreement with 10 banks on foreclosure abuses concludes weeks of feverish negotiations between the federal regulators, led by the Office of the Comptroller of the Currency, and the banks. That settlement will end a troubled foreclosure review mandated by the banking regulators.

The deal, which was hashed out over the weekend, had teetered on the brink of collapse after officials from the Federal Reserve demanded that the banks pay an addition $300 million to address their part in the 2008 financial crisis, according to several people briefed on the negotiations who spoke on condition of anonymity.

The Federal Reserve, though, agreed to back down on the demands in the hope that the pact could move ahead and bring more immediate relief to homeowners struggling to stay afloat in a time of persistent unemployment and a sluggish economy.

The multibillion-dollar foreclosure settlement was driven, to a large extent, by banking regulators, who decided that a review of loan files was inefficient, costly and simply not yielding relief for homeowners, these people said. The goal in scuttling the reviews, which were mandated as part of a consent order in April 2011, was to provide more immediate relief to homeowners.

The comptroller’s office and the Federal Reserve said on Monday that the settlement “provides the greatest benefit to consumers subject to unsafe and unsound mortgage servicing and foreclosure practices during the relevant period in a more timely manner than would have occurred under the review process.”

The relief will be distributed to homeowners even if they did not file a claim for their loan files to be reviewed.

Concerns about the Independent Foreclosure Review began to mount in within the comptroller’s office, according to the people familiar with the matter. The alarm, these people said, was that the reviews were taking more than 20 hours a loan file at a cost of up to $250 an hour. Since the start of the review, the banks, which are required to pay for consultants to review the files, had spent an estimated $1.5 billion.

More vexing, the banking regulators said that the reviews were not providing any relief to borrowers or turning up meaningful instances where homes of borrowers current on their payments were seized, according to these people.

Michael J. de la Merced and Ben Protess contributed reporting.

Article source: http://dealbook.nytimes.com/2013/01/07/bank-of-america-to-pay-10-billion-in-settlement-with-fannie-mae/?partner=rss&emc=rss

DealBook: Banks Reach Settlement on Mortgages

Bank of America bought Countrywide in 2008.Kevork Djansezian/Associated PressBank of America bought Countrywide in 2008.

11:38 a.m. | Updated

Bank of America agreed on Monday to pay more than $10 billion to Fannie Mae to settle claims over troubled mortgages that soured during the housing crash, mostly loans issued by the bank’s Countrywide Financial subsidiary.

Separately, federal regulators reached an $8.5 billion settlement on Monday to resolve claims of foreclosure abuses that included flawed paperwork used in foreclosures and bungled loan modifications by 10 major lenders, including JPMorgan Chase, Bank of America and Citibank. About $3.3 billion of that settlement amount will go toward Americans who went through foreclosure in 2009 and 2010, while $5.2 billion will address other assistance to troubled borrowers, including loan modifications and reductions of principal balances. Eligible homeowners could get up to $125,000 in compensation.

The two agreements are not directly related, but they illustrate the extent of the banks’ role in the excesses of the credit boom, from the making of loans to the seizure of homes.

Related Links



Under the terms of the Bank of America deal, the bank will pay Fannie Mae $3.6 billion and will also spend $6.75 billion to buy back mortgages from the housing finance giant.

The settlement will resolve all of the lender’s disputes with Fannie Mae, removing a major impediment to Bank of America’s rehabilitation. The bank had settled its fight with Freddie Mac, the other government-owned mortgage giant, in 2011.

Both Fannie and Freddie, which have posted billions of dollars in losses in recent years, have argued that Countrywide misrepresented the quality of home loans that it sold to the two entities at the height of the mortgage bubble. Bank of America assumed those troubles when it bought Countrywide in 2008.

Brian Moynihan, chief of Bank of America.Win McNamee/Getty ImagesBrian Moynihan, chief of Bank of America.

Before the latest settlement announced on Monday, the Countrywide acquisition had cost Bank of America more than $40 billion in losses on real estate, legal costs and settlements, according to several people close to the bank.

By removing part of the bank’s mortgage albatross, the move is a continued retreat from home lending by Bank of America, even as rivals including JPMorgan Chase and Wells Fargo compete for the profitable refinance business that has boomed with interest rates persistently low.

Bank of America also agreed to sell the servicing rights on about $306 billion worth of home loans to other firms. In separate statements, Nationstar Mortgage Holdings and the Newcastle Investment Corporation announced they were buying the rights. Those servicing costs, which were roughly $3.4 billion in the third quarter, have weighed on the bank’s profits, especially as borrowers fall behind on their bills.

Brian T. Moynihan, the bank’s chief executive, said in November that he intended to sell off about two million loans the bank currently serviced.

“Together, these agreements are a significant step in resolving our remaining legacy mortgage issues, further streamlining and simplifying the company and reducing expenses over time,” Mr. Moynihan said in a statement on Monday.

Bank of America said it expected the settlement to hurt its fourth-quarter earnings by $2.5 billion because of costs tied to foreclosure reviews and litigation. The firm also expects to record a $700 million charge, an accounting move known as a debt-valuation adjustment, related to an improvement in the prices of its bonds.

The deal on Monday helps the bank move away from its troubled mortgage business. Still, the bank’s attempts to resolve other costly mortgage litigation have so far been stymied. Looking to appease investors that sued the bank for losses when mortgages packaged into securities imploded during the financial crisis, the bank agreed to pay $8.5 billion in June 2011. But the settlement, which would help mollify investors including the Federal Reserve Bank of New York and Pimco, has been stalled.

Further thwarting Bank of America’s retreat from the mortgage business, federal prosecutors sued the bank in October, accusing it of churning through loans so quickly that quality controls were virtually forgotten. The Justice Department sued the bank under a law that could mean Bank of America could pay well more than $1 billion to settle.

Bank of America has been embroiled with other legal woes, including accusations that it misled investors about the acquisition of Merrill Lynch. Shareholders, led by pension funds, had said the bank provided false and misleading statements about the health of the Wall Street firm, which, unknown to the public, was racking up huge losses in late 2008 amid turmoil in the markets.

The separate agreement with 10 banks on foreclosure abuses concludes weeks of feverish negotiations between the federal regulators, led by the Office of the Comptroller of the Currency, and the banks. That settlement will end a troubled foreclosure review mandated by the banking regulators.

The deal, which was hashed out over the weekend, had teetered on the brink of collapse after officials from the Federal Reserve demanded that the banks pay an addition $300 million to address their part in the 2008 financial crisis, according to several people briefed on the negotiations who spoke on condition of anonymity.

The Federal Reserve, though, agreed to back down on the demands in the hope that the pact could move ahead and bring more immediate relief to homeowners struggling to stay afloat in a time of persistent unemployment and a sluggish economy.

The multibillion-dollar foreclosure settlement was driven, to a large extent, by banking regulators, who decided that a review of loan files was inefficient, costly and simply not yielding relief for homeowners, these people said. The goal in scuttling the reviews, which were mandated as part of a consent order in April 2011, was to provide more immediate relief to homeowners.

The comptroller’s office and the Federal Reserve said on Monday that the settlement “provides the greatest benefit to consumers subject to unsafe and unsound mortgage servicing and foreclosure practices during the relevant period in a more timely manner than would have occurred under the review process.”

The relief will be distributed to homeowners even if they did not file a claim for their loan files to be reviewed.

Concerns about the Independent Foreclosure Review began to mount in within the comptroller’s office, according to the people familiar with the matter. The alarm, these people said, was that the reviews were taking more than 20 hours a loan file at a cost of up to $250 an hour. Since the start of the review, the banks, which are required to pay for consultants to review the files, had spent an estimated $1.5 billion.

More vexing, the banking regulators said that the reviews were not providing any relief to borrowers or turning up meaningful instances where homes of borrowers current on their payments were seized, according to these people.

Michael J. de la Merced and Ben Protess contributed reporting.

Article source: http://dealbook.nytimes.com/2013/01/07/bank-of-america-to-pay-10-billion-in-settlement-with-fannie-mae/?partner=rss&emc=rss

Fair Game: In an F.H.A. Checkup, a Startling Number

Like Fannie Mae and Freddie Mac before it, the Federal Housing Administration is suffering in a mortgage hell of its own making. F.H.A. officials say they won’t need taxpayers’ help, but we’ve heard that kind of line before.

The F.H.A. backs $1.1 trillion of American mortgages and, by the look of things, it’s in deep trouble. Last year, its mortgage insurance fund was valued at $1.2 billion. Today that fund is valued at negative $13.48 billion.

Granted, that figure, reported by F.H.A.’s auditor, doesn’t represent actual losses. It’s an estimate of the difference between future mortgage insurance premiums that the F.H.A. will collect and the expected losses on the mortgages that the agency is obligated to cover over time, combined with the agency’s existing capital resources.

But the upshot is this: If the F.H.A. were to stop insuring new home loans today, it wouldn’t have the money it needs to cover its expected losses in the coming years.

The F.H.A., a unit of the Department of Housing and Urban Development, is not about to stop insuring mortgages. Its officials say that without the F.H.A., people would have a tougher time getting home loans, and the housing market would suffer. (The F.H.A. insures loans of up to $729,750 in certain areas and requires down payments as low as 3.5 percent.)

But the sharp decline in the fund’s value is a stark reminder that the mortgage mess is still very much with us, even as the real estate market seems to be recovering. In November 2011, for example, the F.H.A.’s auditor projected that the fund’s value would climb to $9.5 billion this year.

The agency acknowledged that its financial position is a hostage to insured loans that still have “significant foreclosure and claim activity yet to occur.”

Whether the F.H.A. will have to turn to the Treasury for help, of course, remains to be seen. That step would be determined by assumptions used in the Obama administration’s 2014 budget proposal, due early next year, and not the auditor’s report.

But neither the F.H.A. nor its auditor has a great record when it comes to forecasting. Its current woes, F.H.A. officials say, stem largely from toxic loans that it insured between 2007 and 2009.

Loans insured since 2010 are performing well, according to the agency. The main reason is that it is essentially catering to a better class of homeowner. In 2008, a quarter of all the loans it insured were made to borrowers with credit scores below 600. (A score of 850 is the highest possible.) In 2010, that figure was 2 percent.

IN an interview on Friday, Carol J. Galante, the acting commissioner of the F.H.A., said that initial data from recent loans, like that for early payment defaults, is showing far superior results over older loans. “We see dramatic improvement that gives us some level of confidence that they are certainly performing much, much better than the older books of business,” she said. Ms. Galante added that higher credit scores also pointed to fewer losses on newer loans.

That may not last. Mortgage experts say it takes three to five years for loans to “season” and for reliable loss patterns to emerge.

Even Barry L. Dennis, the president of Integrated Financial Engineering, the F.H.A.’s auditor, says it is too soon to say with certainty how the recent loans will perform.

“So far, the delinquency statistics on those books are very encouraging,” he said. “But we haven’t gone long enough for the default statistics to prove that those books are better.”

The F.H.A. also predicts that the years ahead will bring fewer losses because the larger loans that it began insuring in 2008 are better performers. The agency insures loans of up to $729,750, well above the $417,000 cap on mortgages guaranteed or bought by Fannie Mae and Freddie Mac.

Whether these loans continue to perform well is another question, given that many are not yet seasoned.

“Our equations assign less risk to a larger loan,” Mr. Dennis said in an interview last week. “But that’s not to say across the board that larger loans are less risky, everything else constant.”

In addition, the F.H.A.’s limited experience with high-balance loans means that it has little data with which it can project losses accurately. Ms. Galante conceded this point, but added that recent increases in premiums levied on borrowers would help offset future losses at her agency. Initial fees rose this year to 1.75 percent of a loan balance, from 1 percent, while ongoing premiums are also going up.

A big question is whether the F.H.A.’s prehistoric technology undermines the accuracy of its data. In 2009, an independent auditor’s report found significant deficiencies in the agency’s aging information systems. Three years later, the agency is still trying to migrate from its creaky Computerized Home Underwriting Management System to a more modern one.

For example, the agency’s system cannot spit out an accurate history of modifications on the loans it insures. As a result, these histories have to be recorded manually.

“The systems are old and antiquated and are in the process of being updated,” Ms. Galante said. “But in terms of the underlying analytics of the performance of the portfolio, that’s not an element of concern.”

The F.H.A. is anticipating a better 2013 for itself and — who knows? — it may be right. But then, Fannie Mae and Freddie Mac played down their troubles for years, and we know how that ended.

Article source: http://www.nytimes.com/2012/12/02/business/in-an-fha-checkup-a-startling-number.html?partner=rss&emc=rss

Bucks Blog: Hurricane Sandy and the Need for More Paperwork for Mortgages

Homes on the New Jersey coast damaged by Hurricane Sandy.ReutersHomes on the New Jersey coast damaged by Hurricane Sandy.

A colleague whose home is located in an area affected by Hurricane Sandy thought he had signed the final papers last week for a refinance of his mortgage. But on Wednesday, his lender said that because his home was in a declared disaster area, he’d have to provide additional documents.

That might not be the easiest thing to do, since getting documents may be a challenge for those in areas without power.

A Bank of America spokesman, Kris Yamamoto, said that due to “G.S.E. guidelines and our policy, and depending on the category of the disaster area,” there may be additional requirements to process a loan, like an inspection or certification on the property. (The term G.S.E. refers to government-sponsored enterprises like Fannie Mae or Freddie Mac, which are major buyers of home loans.)

He also said that if the processing of a loan is delayed because of a bank site’s being temporarily closed, and the interest rate lock expires during that time, the customer would continue to qualify for their previous interest rate.

A Chase spokeswoman said she was looking into my inquiry. Meantime, she said, Chase is automatically giving many borrowers affected by the storm a seven-day extension on an interest rate lock if they were scheduled to close on a mortgage this week. (She said the extension applied to Connecticut, Delaware, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Virginia and the District of Columbia.)

Wells Fargo didn’t immediately respond to an e-mail request for information about how the storm was affecting loan applications.

Do you have a home loan or refinance pending? Has the storm affected your application?

Article source: http://bucks.blogs.nytimes.com/2012/10/31/sandy-and-the-need-for-more-time-paperwork-for-mortgages/?partner=rss&emc=rss

Op-Ed Columnist: The Big Lie

You begin with a hypothesis that has a certain surface plausibility. You find an ally whose background suggests that he’s an “expert”; out of thin air, he devises “data.” You write articles in sympathetic publications, repeating the data endlessly; in time, some of these publications make your cause their own. Like-minded congressmen pick up your mantra and invite you to testify at hearings.

You’re chosen for an investigative panel related to your topic. When other panel members, after inspecting your evidence, reject your thesis, you claim that they did so for ideological reasons. This, too, is repeated by your allies. Soon, the echo chamber you created drowns out dissenting views; even presidential candidates begin repeating the Big Lie.

Thus has Peter Wallison, a resident scholar at the American Enterprise Institute, and a former member of the Financial Crisis Inquiry Commission, almost single-handedly created the myth that Fannie Mae and Freddie Mac caused the financial crisis. His partner in crime is another A.E.I. scholar, Edward Pinto, who a very long time ago was Fannie’s chief credit officer. Pinto claims that as of June 2008, 27 million “risky” mortgages had been issued — “and a lion’s share was on Fannie and Freddie’s books,” as Wallison wrote recently. Never mind that his definition of “risky” is so all-encompassing that it includes mortgages with extremely low default rates as well as those with default rates nearing 30 percent. These latter mortgages were the ones created by the unholy alliance between subprime lenders and Wall Street. Pinto’s numbers are the Big Lie’s primary data point.

Allies? Start with Congressional Republicans, who have vowed to eliminate Fannie and Freddie — because, after all, they caused the crisis! Throw in The Wall Street Journal’s editorial page, which, on Wednesday, published one of Wallison’s many articles repeating the Big Lie. It was followed on Thursday by an editorial in The Journal making essentially the same point. Repetition is all-important to spreading a Big Lie.

In Wallison’s article, he claimed that the charges brought by the Securities and Exchange Commission against six former Fannie and Freddie executives last week prove him right. This is another favorite tactic: He takes a victory lap whenever events cast Fannie and Freddie in a bad light. Rarely, however, has his intellectual dishonesty been on such vivid display. In fact, what the S.E.C.’s allegations show is that the Big Lie is, well, a lie.

Central to Wallison’s argument is that the government’s effort to encourage homeownership among low- and moderate-income Americans is what led to the crisis. Fannie and Freddie, which were required by law to meet certain “affordable housing mandates,” were the primary instruments of that government policy; their need to meet those mandates, says Wallison, is what caused them to dive so heavily into those “risky” mortgages. And because they were powerful forces in the housing market, their entry into subprime dragged along the rest of the mortgage industry.

But the S.E.C. complaint makes almost no mention of affordable housing mandates. Instead, it charges that the executives were motivated to begin buying subprime mortgages — belatedly, contrary to the Big Lie — because they were trying to reclaim lost market share, and thus maximize their bonuses.

As Karen Petrou, a well-regarded bank analyst, puts it: “The S.E.C.’s facts paint a picture in which it wasn’t high-minded government mandates that did [Fannie and Freddie] wrong, but rather the monomaniacal focus of top management on market share.” As I wrote on Tuesday, Fannie and Freddie, rather than leading the housing industry astray, got into riskier mortgages only after the horse was out of the barn. They were becoming irrelevant in the most profitable segment of the market — subprime. And that they couldn’t abide.

(The S.E.C., I should note, had its own criticism of my column, saying that I conflated its allegations regarding the lack of disclosure of subprime mortgages, with an entirely different set of charges it has brought regarding disclosure of so-called Alt-A loans. I still maintain that the S.E.C.’s charges are weak, and that the agency brought the case in part for political reasons: how better to curry favor with House Republicans than to go after former Fannie and Freddie executives?)

Three years after the financial crisis, the country would be well served by a real debate about the role of government in housing. Should the government be helping low- and moderate-income Americans own their own homes? If so, is there an acceptable level of risk? If not, how do we recast the American dream?

To have that debate, though, we need a clear understanding of what role the government’s affordable-housing goals did — and did not — play in the crisis. And that is impossible as long as the Big Lie holds sway.

Which, now that I think of it, may be the whole point of the exercise.

Article source: http://feeds.nytimes.com/click.phdo?i=87e49684f2581dba870541b62dc25488